No products in the cart.

Home Business Understanding the change fee and the Bank of Ghana’s position – Life Pulse Daily

Business

Understanding the change fee and the Bank of Ghana’s position – Life Pulse Daily

Editor-in-chiefJanuary 6, 20263 Mins read50

Understanding the change fee and the Bank of Ghana’s position – Life Pulse Daily

Introduction

Understanding how the Ghana cedi exchange rate is influenced is crucial for businesses, investors, and everyday citizens. A common misconception persists that the Bank of Ghana strengthens the cedi by “supplying dollars” to the market. This article explains why that view is misleading and reveals the real mechanism behind exchange rate movements in Ghana.

Key Points

The Bank of Ghana does not create U.S. dollars; it creates cedis.
When the Bank sells dollars, it removes cedis from circulation, reducing liquidity.
Less cedi liquidity means less demand for foreign currency, which can strengthen the cedi.
The Bank influences the exchange rate primarily through cedi liquidity, not dollar supply.
Data from 2025 shows a clear link between falling cedi liquidity and cedi appreciation.

Background

The Misleading Narrative

Media reports and market commentary often state that the Bank of Ghana “supplies dollars” to stabilize or strengthen the cedi. This phrasing suggests that increasing the physical availability of U.S. dollars directly improves the cedi’s value. However, this explanation overlooks the fundamental mechanics of foreign exchange markets and central bank operations.

How Foreign Exchange Markets Work

In a floating exchange rate system like Ghana’s, currency values are determined by supply and demand. The Bank of Ghana intervenes in the market by buying or selling foreign currency reserves, but the effect depends on the domestic currency’s availability and the overall monetary environment.

Analysis

The Real Mechanism: Cedi Liquidity Matters

When the Bank of Ghana sells U.S. dollars to commercial banks, it receives cedis in return. Those cedis are then removed from the financial system. This reduction in cedi liquidity decreases the ability of banks and businesses to purchase foreign currency, thereby reducing demand for dollars.

With fewer cedis chasing dollars, the pressure on the exchange rate eases. The cedi can appreciate not because more dollars are available, but because fewer cedis are in circulation.

2025 Evidence: Liquidity Tightening and Cedi Strength

Data from 2025 provides strong evidence for this mechanism:

Reserve money growth, which was over 60% in March, turned negative by September.
M2+ (broad money supply) growth fell from over 30% early in the year to single digits by October.
During the same period, the cedi exchange rate improved from about 14.1 to the dollar in April to around 10.5–11.4 between August and October — an appreciation of roughly 30–40%.

The timing of these changes is not coincidental. As cedi liquidity tightened, demand for dollars decreased, and the cedi strengthened.

Policy Implications

This understanding shifts the focus from foreign reserves to domestic monetary conditions. Exchange rate stability in Ghana depends more on controlling cedi supply than on the size of the central bank’s dollar reserves.

Practical Advice

For Businesses

Businesses involved in import/export should monitor domestic liquidity trends and central bank policy announcements, not just foreign reserve levels. A tightening of cedi liquidity often signals potential cedi appreciation.

For Investors

Investors should consider monetary aggregates and policy direction when assessing currency risk. Short-term interventions may provide temporary relief, but sustained exchange rate stability requires sound domestic monetary management.

For Policymakers

Clear communication about the role of liquidity management can improve market understanding and reduce speculative pressure on the currency. Emphasizing domestic monetary discipline over reserve levels can lead to more sustainable exchange rate outcomes.

FAQ

Does the Bank of Ghana create U.S. dollars?

No. The Bank of Ghana creates cedis. It can only redistribute existing dollar reserves through foreign exchange operations.

Why does selling dollars strengthen the cedi?

Selling dollars removes cedis from circulation, reducing demand for foreign currency and easing pressure on the exchange rate.

Can the Bank of Ghana run out of dollars?

In theory, yes, if outflows are sustained and reserves are insufficient. However, the more immediate constraint is often the impact of liquidity tightening on the domestic economy.

What other tools does the Bank of Ghana have?

The Bank also uses interest rates, reserve requirements, and open market operations to manage liquidity and influence the exchange rate.

Is a stronger cedi always good?

Not necessarily. While it reduces import costs, it can hurt export competitiveness. A stable, predictable exchange rate is often more important than a strong one.

Conclusion

The phrase “BoG supplies dollars” persists because it describes what observers see during FX auctions. However, it misses the deeper truth: the Bank of Ghana strengthens the cedi by reducing cedi liquidity, not by increasing dollar supply. Recognizing this distinction leads to a clearer understanding of exchange rate dynamics and more informed policy discussions.

Exchange rate stability in Ghana ultimately depends on sound domestic monetary management. While foreign reserves are important, they are not the primary driver of currency value. By focusing on cedi liquidity and broader economic fundamentals, stakeholders can better navigate exchange rate fluctuations and support sustainable economic growth.